Commerce Act penalties - the bigger they are, the harder they fall?

Monday 9 May 2011

Author: Simon Ladd

​First published in NZ Lawyer, 6 May 2011.

On 19 April 2011, the High Court imposed a penalty of $12 million on Telecom for breaches of section 36 of the Commerce Act 1986 (the Act), the highest penalty ever imposed under the Act (Commerce Commission v Telecom, High Court, Auckland, 19 April 2011, Rodney Hansen J). The Court's penalty judgment followed an earlier liability judgment holding that, between March 2001 and late 2004, Telecom had taken advantage of its market power in wholesale and retail markets for data transmission in order to deter potential or existing competitors (High Court, Auckland, 9 October 2009, Rodney Hansen J and Professor Martin Richardson). Telecom has appealed both the liability and penalty judgments.

The Telecom penalty judgment follows hard on the heels of the previous record holder, a penalty of $6 million imposed on Cargolux on 18 March 2011 in the Commerce Commission's air cargo proceedings (Commerce Commission v Cargolux, High Court, Auckland, 18 March 2011, Potter J). In contrast to the Cargolux judgment, which proceeded on the basis of admitted breaches and a penalty that was jointly recommended to the Court, the Telecom judgment is a rare beast, a case where the amount of the penalty was disputed and determined by the Court after a defended penalty hearing.

The Telecom judgment reflects a trend of steadily increasing penalties since Parliament signalled its intention to treat anti-competitive conduct more seriously by increasing the maximum possible penalty for each breach of the Act to the greater of $10 million or, if the commercial gain from the contravention "can be readily ascertained", three times the commercial gain or, if it cannot be readily ascertained, 10% of the turnover of the body corporate and all of its connected bodies corporate (the Commerce Amendment Act 2001).

The amount of the penalty is a discretionary matter. Under section 80 of the Act, the Court may order "such pecuniary penalty as the Court determines to be appropriate". That discretion is subject only to a requirement that the Court "must have regard to all relevant matters" and in particular "in the case of a body corporate, the nature and extent of any commercial gain." In addition to commercial gain, the Courts consider the nature and extent of the contraventions; duration of contravening conduct; deliberateness of the conduct; knowledge of senior management; and loss or damage to others.

In the Telecom case, the Court accepted that commercial gain cannot be readily ascertained "unless it can be quantified in a timely, efficient, and relatively straightforward manner and with reasonable precision and specificity." Meeting those requirements is usually difficult, and Justice Hansen concluded that it could not be done (although Telecom had provided an analysis of its revenue from the conduct in question, the Court rejected this analysis, which was "of bewildering complexity", because it required expert economic evidence that was not before the Court.) The nature of the difficulty in such cases was articulated by Justice Middleton in ACCC v Telstra Corporation [2010] FCA 790: "As is regularly the case where anti-competitive conduct has resulted in the denial or delay of entry into a market, it is not easy to quantify the exact amount of loss or damage in these circumstances. Part of the difficulty in quantifying the loss is that there are significant qualititative aspects, such as how the conduct affects the quality of the access seekers' overall competitive offering."

This reflects a number of issues. First, in many cases, the underlying factual position is complex. Secondly, the legal analysis of breaches of section 36 requires the Court to consider how the defendant actually acted against how it would have acted in a hypothetical counterfactual scenario in which it did not have substantial market power. Finally, the economic analysis built on those (usually highly contentious) factual and legal foundations may be more complex still.

However, in the absence of a determination of the commercial gain, it is difficult to identify a principled basis guiding the determination of the amount of the penalty. On one hand, the Court has clearly and carefully considered the relevant factors and made its judgment on the evidence available to it. In particular, the Court has been guided by the need for effective deterrence. Justice Hansen stated, "The dominant reason for penalties under competition law is the forward looking aim of promoting general deterrence. To promote deterrence, illegal conduct must be profitless, which means that the expected penalty should be linked to the expected illegal gain. The courts should severely penalise today's offender to discourage others from committing similar acts."

In that context, the size of the contravening company is also a relevant consideration. Justice Hansen stated "The penalty should reflect the size and financial circumstances of Telecom and its position of influence and importance in the telecommunications industry. The goal of specific deterrence requires that the penalty take account of the size and resources of the contravening company."

On the other hand, in the absence of an identified commercial gain neither deterrence nor the size of the company provide a principled basis for determining the amount of the penalty to be imposed. In the Telecom case, the penalty of $12 million appears to have been plucked out of the air. It was not arrived at by reference to the gain to Telecom, loss to competitors, penalties imposed in other cases, or even the maximum penalty provided for under the Act of $279.2 million (assessed as 10% of Telecom's turnover). In short, having considered "all relevant matters", the Court has then found itself leaping into the unknown.

If the Commerce Commission is to seek and the Courts are to impose significant penalties, should we expect more to be done to quantify commercial gain, in particular in the context of the specific direction in section 80(2A) that the Court must have regard to the nature and extent of any commercial gain? As Courts in New Zealand and Australia have noted, these matters are very complex. They impose significant costs for the Courts (including use of scarce Court time), Commission and defendants. It may be that the additional costs involved in a more rigorous approach would not significantly improve determination of penalties by more accurately matching the amount of the penalty to the gain (i.e., forcing the defendant to disgorge the profits it has made). However, the penalties are increasingly high, there are costs involved in both under and over-penalising relative to the commercial gain, and is this actually harder than other complex loss calculations that the Courts entertain? Would a competitor bringing a damages claim under section 82 of the Act concede that the amount of the defendant's wrongful gain and/or its own losses could not be accurately ascertained?

Telecom has appealed the liability and penalty judgments, which are due to be heard by the Court of Appeal in September. In the High Court, Telecom maintained that the limited nature of the contravening conduct and the absence of evidence of material commercial gain or exclusionary effects told against the imposition of any pecuniary penalty. The Court of Appeal is unlikely to accept that submission given the penalty regime's purpose of general deterrence, but further guidance as to determination of the amount of penalties – including whether the Courts should take a more nuanced approach – will be welcome.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Simon Ladd

    Partner Auckland
Related areas of expertise
  • Competition